Payment Channel
TECHNOLOGYDEFINITION
A two-party arrangement where bitcoin is locked on-chain once, then transacted instantly off-chain any number of times. Only the opening and final closing balance ever touch the blockchain.
Think of it as a bar tab: you hand the bartender your card once (the channel-opening transaction), order all night with zero friction (off-chain payments), and settle a single final bill at close (the channel-closing transaction). Between open and close, the two parties can shuffle the locked balance between themselves thousands of times per second, for fractions of a cent.
Payment channels are the atoms of the Lightning Network: chain enough of them together and a payment can hop from you to anyone on the network through intermediary nodes, without you opening a channel to every counterparty. Public channels are announced to the network for routing; private channels (common between wallets and their service providers) stay invisible — one reason public capacity statistics understate the network's real size.
IN A SENTENCE
“She opened one payment channel in January and has paid for coffee with it every day since — the blockchain has seen exactly one transaction.”
Key facts
Common questions
Can the other party steal my channel funds?
No — the channel is a 2-of-2 multisig, and the protocol punishes cheating: broadcasting an old channel state lets the honest party claim the cheater's entire balance.
Why not just do everything on-chain?
Bitcoin's base layer processes a few transactions per second, by design, so every node on earth can verify it. Channels move everyday payments off-chain while inheriting the base layer's security for settlement.